RBI expected to cut interest rate on Wednesday

Mumbai, Dec 6 (IANS) Expectations are high of an interest rate cut by the RBI when it announces its bi-monthly monetary policy review on Wednesday, as banks are flush with funds following the November 8 demonetisation of high value currency.

The Reserve Bank of India’s first policy review after the demonetisation measure, will be its second based on the recommendation of the Monetary Policy Committee (MPC) set up earlier this year.

Following the MPC’s first meeting in October, the RBI cut the repo, or the rate it lends short-term to commercial banks, by 25 basis points (bps) and it currently stands at 6.25 per cent.

RBI may cut the main interest rate by 50 basis points, feels Keki Mistry, Vice Chairman and CEO of HDFC.

In an interview to BTVi, Mistry said: “My sense is that in the RBI policy, I would expect to see an interest rate reduction. I would have said 25 basis points cut is normally what is warranted. However, to give a further impetus to growth and the economy and taking into account relatively low inflation that we are seeing, it could be possible that RBI could look at a 50 basis points cut.”

“One point is that the US rates are rising. We are expecting that the US Fed will increase rates in December. So in a situation where US is increasing rates, we will be reducing rates and, therefore, the gap between the two interest rates (in the US and India) will fall.

The only issue, he said, for the RBI is to keep the Indian currency rate in check. “As the gap keeps falling, it will put some pressure on the currency. So that is something the RBI may want to watch out for, because if the currency weakens a lot then that puts inflationary pressure on the economy… particularly in the context of the fact that all prices have started going up,” he added.

Unlike in the past, under the new system with the MPC, the review process is now taking place over two days instead of one.

“The Monetary Policy Committee will meet on December 6 and 7, 2016 for the fifth bi-monthly Monetary Policy Statement for 2016-17. The resolution of the MPC will be placed on the website at 2.30 pm on December 7, 2016,” the RBI notice said.

State-run State Bank of India MD Rajnish Kumar said: “We are expecting a cut in the repo rate. Minimum 25-50 bps rate cut is expected in the next monetary policy. People will be surprised if there is no rate cut.”

The MPC, being chaired by new RBI Governor Urjit Patel, has been constituted by the government with the primary mandate to ensure a retail inflation of 4 per cent, plus or minus two percentage points.

The easing of key price indices makes the context favourable for a rate cut by the RBI. India’s annual retail inflation in October eased to 4.2 per cent from 4.39 per cent in September and 5 per cent reported during the corresponding period last year, while wholesale prices in the month in question fell marginally to 3.39 per cent, official data showed in November.

Meanwhile, India’s GDP for the 2016-17 fiscal’s second quarter ended September, estimated at Rs 29.63 lakh crore, recorded a growth of 7.3 per cent compared with 7.1 per cent in the first quarter, data released last week showed.

However, the Gross Domestic Product growth for second quarter was slower than the 7.6 per cent increase posted in the corresponding quarter of the last fiscal (2015-16).

In terms of gross value added (GVA) — considered a better measure of economic performance, as it excludes product taxes and subsidies — of Rs 27.33 lakh crore for the quarter, the growth at 7.1 per cent was slower compared with 7.3 per cent in the previous year, mainly due to a contraction in mining and deceleration in manufacturing.